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Weak margin dents overall profitability

Hitachi Energy’s 1QFY25 result came in significantly below our estimates due to a steep decline in margin. The company reported 28%YoY growth in revenue, whereas a contraction in EBITDA margin led to a sharp miss in PAT. The weak margin performance was due to higher other expenses, which will come down in the coming quarters. Revenue growth was driven by a strong order book and order inflows, which jumped 112% YoY to INR24b. Order inflows were led by strong growth in transmission, industries and renewables. We believe that Hitachi Energy will continue to benefit from energy transition initiatives across domestic and international markets. However, current valuations factor in potential HVDC wins and margin improvement. We thus maintain our Neutral rating on the stock with an unchanged two-year forward TP of INR12,000, based on DCF.

Results sharply lower than our estimates

Hitachi Energy posted an extremely weak set of numbers in 1QFY25, as a sharp contraction in margins resulted in a significant miss on net profit vs. our estimate. Revenue grew 27.6% YoY to INR13.3b (est. INR13.7b), led by the execution of the Mumbai-HVDC project, which is now 30-40% complete. EBITDA margin came in at 3.6%, sharply lower than our expectation of 9%, affected by higher other expenses. The increase in other expenses was due to higher IT expenses (as the company shifted to new systems) and higher royalty (calculated on the base of 4QFY24 revenues and forex hedging cost). The company maintained its double-digit EBITDA margin guidance by FY25-end. Order inflow in 1Q stood at INR24.4b, up 112% YoY, and order backlog stood at INR85.4b. Order inflow came from renewables, distribution utilities, upgrade of digital solutions and service orders. Export orders for transformers, power quality technologies and other key products were booked from markets like Europe, the Middle East, Australia and neighboring countries in South Asia.

We expect Hitachi to be a key beneficiary of high-growth segments

The company remains optimistic about opportunities in energy transition as well as from high-growth segments such as renewables, HVDC, data centers, electrification of transport, etc. In its FY24 annual report too, the company highlighted that it is committed to delivering higher growth than the market and will increase capex on various business units. Additionally, it also plans to launch new products in digital and air-insulated switchgear and is also working on building local capabilities on e-mobility and energy storage. We expect the company to target nearly 60-70% of TAM from HVDC projects and 15-20% of TAM from data center projects. We currently factor in order inflows of INR97b/ INR121b/INR139b for FY25/FY26/FY27

Order inflows boosted by large order win in Australia

Order inflows during the quarter surged 112% YoY to INR24b, led by a healthy contribution from transmission, renewables and industries. Data centers, however, saw a 77% YoY decline as ordering activity tends to be chunky in nature. There was a large transmission order (~INR7.9b) for the Marinus Link Project in Australia, which has been allocated by the parent. Key order wins in 1QFY25 included a) 6x500 MVA ICT, 400kV SR - Adani for Gujarat, TBCB; b) Renew-400/33KV AIS SS_400 MW Solar - NTPC & 200 MW DVC-SECI VIII-NEEMBA-Fatehgarh; c) Kanpur-400/200 kV Digital S/s CRP SAS Retrofit of Existing SS; d) Marinus Link, Australia - HVDC Light Voltage Source Converter; and e) Canada-800 kV CT for Hydro-Québec, Canada.

Focus remains on increasing share of exports and services

The company has managed to improve the share of exports from low-single digits to 25-30% currently, led by robust traction in key geographies such as the Middle East, SE Asia, etc. It is pursuing opportunities both independently as well as through the parent as a feeder factory. Key orders won during the quarter included a) Cegelec Morocco-POLE 26 Senegal Project, b) Quebec Canada-800 KV CT for Hydro- HE Canada, c) Ministry of Electricity Iraq- 145 kV GIS HE Iraq, d) Damco Energy Greece420 kV GIS- HE Greece, and e) EEM: 145 KV GIS- HE Portugal. Similarly, service is another key focus area for the company, with a 4% share in 1Q order inflows, which the management is confident of increasing to high-single digits going forward.

Financial outlook

We maintain our order inflow and revenue estimates for FY25/FY26 and introduce FY27 estimates. However, given the weak margin performance in 1QFY25 and the management’s reiteration of double-digit margin by FY25-end, we cut our margin estimates for FY25/FY26 by 100bp each to 8.5%/11.1%.

Valuation and view

The stock is currently trading at 78x/55x P/E on FY26E/27E earnings. We maintain our Neutral rating with an unchanged two-year forward TP of INR12,000, based on DCF.

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